Archive for the ‘Croatia’ Category

Earlier this week, the DOJ and SEC announced a Foreign Corrupt Practices Act enforcement action against Tyco International Ltd. (“Tyco”) and a subsidiary company. Total fines and penalties in the enforcement action were approximately $26.8 million (approximately $13.7 million in the DOJ enforcement action and approximately $13.1 million in the SEC enforcement action).

This post goes long and deep as to the DOJ’s and SEC’s allegations and resolution documents (approximately 85 pages in total). Tomorrow’s post will discuss various items of note from the enforcement actions.

DOJ

The DOJ enforcement action involved a criminal information (here) against Tyco Valves & Controls Middle East Inc., (an indirect subsidiary of Tyco) resolved through a plea agreement (here) and a non-prosecution agreement (here) entered into between the DOJ and Tyco.

Criminal Information

The criminal information begins by identifying Tyco Valves & Controls Middle East Inc. (TVC ME) as a Delaware company headquartered in Dubai that “sells and markets valves and actuators manufactured by other entities throughout the Middle East for the oil, gas, petrochemical, commercial construction, water treatment,and desalination industries.”

According to the information, Tyco Flow Control Inc. (“TFC) was TVC ME’s direct parent company and TFC was a wholly-owned indirect subsidiary of Tyco. According to the information, “TVC ME’s financials were consolidated into the books and records of TFC for the purposes of preparing TFC’s year-end financial statements, and in turn, TFC’s financials were consolidated into the books and records of Tyco for the purposes of preparing Tyco’s year-end financial results.”

The information alleges a conspiracy as follows.

Between 2003 and 2006 TVC ME conspired with others to ”obtain and retain business from foreign government customers, including Aramco, ENOC, Vopak, NIGC, and other customers by paying bribes to foreign officials employed by such customers.”

The information alleges: that Saudi Aramco (“Aramco”) was a Saudi Arabian oil and gas company that was wholly-owned, controlled, and managed by the government, and an ”agency” and “instrumentality” of a foreign government; that Emirates National Oil Company (“ENOC”) was a state-owned entity in Dubai and an “agency” and “instrumentality” of a foreign government; that Vopak Horizon Fujairah (“Vopak”) was a subsidiary of ENOC based in the U.A.E. and an “agency” and “instrumentality” of a foreign government; and that the National Iranian Gas Company (“NIGC”) was a state-owned entity in Iran and an “agency” and “instrumentality” of a foreign government.

Under the heading “manner and means of the conspiracy” the information alleges in pertinent part as follows.

“TVC ME, together with others, decided to pay bribes to employees of end-customers in Saudi Arabia, the U.A.E., and Iran, including to employees at Aramco, ENOC, Vopak, and NIGC, in order to obtain or retain business. TVE ME, together with others, found ways to obtain cash in order to make the bribe payments. TVE ME, together with others, made payments through Local Sponsor [a company in Saudi Arabia that acted as a distributor for TVC ME in Saudi Arabia]. Local Sponsor provided TVC ME with false documentation, such as fictitious invoices for consultancy costs, bills for fictitious commissions, or ‘unanticipated costs for equipment,’ to justify the payments to Local Sponsor that were intended to be used for bribes. TVE ME, together with others, approved and made payments to Local Sponsor for the purpose of paying bribes. TVC ME, together with others, paid bribes to employees of foreign government customers in order to remove TVC manufacturing plans from various Aramco ‘blacklists’ or ‘holds’; win specific bids; and/or obtain specific product approval. TVC ME, together with others, improperly recorded the bribe payments in TVC ME’s books, records, and accounts, and instead falsely described the payments, including as consultancy costs, commissions, or equipment costs. TVC ME earned approximately $1.153,500 in gross margin as a result of the bribe payments.”

Based on the above conduct, the information charges conspiracy to violate the FCPA’s anti-bribery provisions.

Plea Agreement

The plea agreements sets forth a Sentencing Guidelines range of $2.1 million – $4.2 million. In the plea agreement, the parties agreed that $2.1 million was “appropriate.” Pursuant to the plea agreement, TVC ME agreed “to work with its parent company in fulfilling the obligations” described in Corporate Compliance Program attached to the plea agreement.

NPA

The DOJ also entered into an NPA with Tyco in which the DOJ agreed “not to criminally prosecute [Tyco] related to violations of the books and records provisions of the FCPA … arising from and related to the knowing and willful falsification of books, records, and accounts by a number of the Company’s subsidiaries and affiliates …”.

The NPA contains a Statement of Facts.

Under the heading, “details of the illegal conduct” the NPA states as follows.

“[From 1999 through 2009] certain Tyco subsidiaries falsified books, records, and accounts in connection with transactions involving customers of Tyco’s subsidiaries, including government customers, in order to secure business in various countries, including China, India, Thailand, Laos, Indonesia, Bosnia, Croatia, Serbia, Slovenia, Slovakia, Iran, Saudia Arabia, Libya, Syria, the United Arab Emirates, Mauritania, Congo, Niger, Madagascar, and Turkey. During that time period, certain Tyco subsidiaries made payments, both directly and indirectly, to government officials and falsely described the payments to government officials in Tyco’s corporate books, records, and accounts as legitimate charges, including as ‘consulting fees,’ ‘commissions,’ ‘unanticipated costs for equipment,’ ‘technical consultation and marketing promotion expenses,’ ‘conveyance expenses,’ ‘cost of goods sold,’ ‘promotional expenses,’ and ‘sales development’ expenses. As early as 2004, Tyco alerted the Securities and Exchange Commission to payments at certain of Tyco’s subsidiaries that could violate the FCPA. In 2006, Tyco acknowledged that ‘prior to 2003 Tyco did not have a uniform, company-wide FCPA compliance program in place or a system of internal controls sufficient to detect and prevent FCPA misconduct at is globally dispersed business units’ and that ‘employees at two Tyco subsidiaries in Brazil and South Korea did not receive adequate instruction regarding compliance with the FCPA, despite Tyco’s knowledge and awareness that illicit payments to government officials were a common practice in the Brazilian and South Korean construction and contracting industries.’ However, despite Tyco’s knowing of a high probability of the existence of improper payments and false books, records, and accounts, the improper payments and falsification of books, records, and accounts continued until 2009.”

As to Thailand, the Statement of Facts states a follows.

“[Between 2004 and 2005] ET Thailand [Earth Tech (Thailand) Ltd. - a Thai corporation that was approximately 49% indirectly owned by Tyco] made payments in the amount of approximately $292,286 to a consultant and recorded those amounts as fictitious disbursements related to the NBIA project [New Bangkok International Airport]. In connection with these improper payments, ET Thailand earned approximately $879,258 in gross profit.”

“[Between 2000 to 2006] ADT Thailand [ADT Sensormatic Thailand an indirect wholly owned subsidiary of Tyco] recorded payments in the amount of approximately $78,000 to one of its subcontractors as payments for site surveys for a government traffic project in Laos, but the payments instead were channeled to other recipients in connection with ADT Thailand’s business in Laos. During the same time period, ADT Thailand made payments to one of its consultants related to a contract for the installation of a CCTV system in the Thai Parliament House, and ADT Thailand and the consultant created invoices that stated that the payments were for ‘renovation work’ when no renovation work was actually performed. During that same time period, ADT Thailand made three payments in connection with a design and traffic survey that ADT Thailand provided from the city of Pattaya, in Southern Thailand, but the payments were issued pursuant to falsified invoices without any evidence that work was ever performed. In connection with these improper transactions, ADT Thailand earned approximately $473,262 in gross profit.”

As to China, the Statement of Facts state as follows.

“[Between 2003 and 2005] TTC Huzhou [Tyco Thermal Controls (Shanghai) Co. Ltd. an indirect wholly owned subsidiary of Tyco] authorized approximately 112 payments in the amount of $196,267 to designers at design institutes owned or controlled by the Chinese government, and falsely described the payments in company books, records, and accounts as ‘technical consultation’ or ‘marketing promotion’ expenses. In 2005, in connection with a contract with China’s Ministry of Public Security, TTC Huzhou paid a commission to one of its sales agents that was used, in part, to pay the ‘site project team’ of a state-owned corporation, and that was improperly recorded in the company’s books and records. In connection with these improper transactions, TTC Huzhou earned approximately $3,470,180 in gross profit.”

“TFCT Shanghai [Tyco Flow Control Trading (Shanghai) Ltd. an indirect wholly owned subsidiary of Tyco] made approximately eleven payments in the amount of approximately $24,000 to employees of design institutes, engineering companies, subcontractors and distributors which were inaccurately described in its books and records. In connection with these improper transaction, TFCT Shanghai earned approximately $59,412 in gross profit.”

“[Between 2005 and 2006] TFC HK [Tyco Flow Control Hong Kong Limited] and Keystone [Beijing Valve Co. Ltd.] [both indirect wholly owned subsidiaries of Tyco] made payments in the amount of approximately $137,000 to agencies owned by approximately eight Keystone employees, who in turn gave cash or gifts to employees of design institutes or commercial customers, and then improperly recorded these payments. [From 2005 to 2006] Keystone made payments to one of its sales agents in connection with sales to Sinopec, for which no legitimate services were actually provided, and then improperly recorded the payments as ‘commissions.’ In connection with these improper transactions, Keystone earned approximately $378,088 in gross profits.”

“[Between 2001 to 2002] THC China [Tyco Healthcare International Trading (Shanghai) Co. Ltd. an indirect wholly owned subsidiary of Tyco] gave publicly-employed healthcare professionals (HCPs) approximately $250,00o in meals, entertainment, domestic travel, gifts and sponsorships. [Between 2004 to 2007] employees of THC China submitted expenses claims related to entertaining HCPs that were supported by fictitious receipts, including references to a non-existent company, in order to circumvent Tyco’s internal guidelines. In connection with medical conferences involving HCPs, THC China employees submitted false itineraries and other documentation that did not properly identify trip expenses in order to circumvent internal controls and policies. Approximately $353,800 in expenses was improperly recorded as a result of the false documentation relating to these improper expenditures.”

As to Slovakia, the Statement of Facts state as follows.

“[Between 2004 to 2006] Tatra [a Slovakian joint venture that was approximately 90 percent indirectly owned by Tyco] made payments in the amount of approximately $96,000 to one of its sales agents in exchange for the sale agent’s attempt to have Tatra products included in the specifications for tenders to a government customer, while at the same time the sales agent was getting paid by the government customer to draw up the technical specifications for the tenders. Tatra improperly recorded the payments to the sales agent as ‘commissions’ in Tatra’s books and records. In connection with these improper transactions, Tatra earned approximately $226,863 in gross profit.”

As to Indonesia, the Statement of Facts state as follows.

“[Between 2003 and 2005] Eurapipe [Tyco Eurapipe Indonesia Pt. an indirect wholly owned subsidiary of Tyco] made approximately eleven payments in the amount of approximately $358,000 to a former employee of Banjarmasin provincial level public water company (PDAM) and two payments to the project manager for PDAM Banjarmasin in connection with the Banjarmasin Project. During the same time period, Eurapipe made payments in the amount of approximately $23,000 to sales agents who then passed some or all of the payments on to employees of government entities in connection withe projects other than the Banjarmasin Project. Eurapipe improperly recorded the payments as ‘commissions payable’ in Eurapipe’s books and records. In connection with these improper transactions, Eurapipe earned approximately $1,298,453 in gross profit.”

“[Between 2002 and 2005] PT Dulmision Indonesia [an Indonesia corporation 99% indirectly owned by Tyco] made payments to third parties, a portion of which went to employees of PLN [a state-owned electricity company in Indonesia], including approximately seven payments one of PT Dulmison’s sales agents, who in turn passed money on to the PLN employees. PT Dulmison Indonesia improperly recorded the payments in PT Dulmison Indonesia’s books, records and accounts. In addition, PT Dulmison Indonesia improperly recorded travel expenses in company books and records, including payments for non-business entertainment in connection with visits by PLN employees to TE Dulmision Thailand’s factory and paid hotel costs incurred as part of a social trip to Paris for PLN employees following a factory visit to Germany, as ‘cost of goods sold’ in PT Dulmison Indonesia’s and TE Dulmison Thailand’s records. In connection with these improper transactions, PT Dulmision Indonesia and TE Dulmison Thailand earned approximately $109,259 in gross profit.”

As to Vietnam, the Statement of Facts state as follows.

“[Between 2001 and 2005] TE Dulmison Thailand [a Thai corporation approximately 66% indirectly owned by Tyco] made nine payments in the amount of approximately $68,426, either directly or through intermediaries, to employees of a public utility owned by the Government of Vietnam and recorded these payments in the books and records of the relevant subsidiaries as ‘cost of goods sold.’”

As to Mauritania, Congo, Niger and Madagascar, the Statement of Facts state as follows.

“[Between 2002 to 2007] Isogard [a branch of Tyco Fire & Integrated Solutions France (TFIS France0, an indrect wholly owned subsidiary of Tyco] made payments to a security officer employed by a government-owned mining company in Mauritania involved in the technical aspects of sales projects for the purpose of introducing Isogard to local buyers in Africa. Isogard made the payments to the security officer’s personal bank account in France without any written contract or invoice and improperly recorded the payments in Isogard’s books and records. Isogard paid sham ‘commissions’ to approximately twelve other intermediaries in Mauritania, Congo, Niger and Madagascar, half of which were to employees, or family members of employees, of Isogard customers. In total, TFIS France made paments in the amount of approximately $363,839 since 2005.”

As to Saudi Arabia, in addition to the conduct at issue in TVC ME’s criminal information, the Statement of Facts state as follows.

“[Between 2004 through 2006] Saudi Distributor maintained a ‘control account’ from which a number of payments were made at THC Saudi Arabia’s [an operational entity within Tyco Healthcare AG, a indirect wholly owned subsidiary of Tyco] direction to Saudi hospitals and doctors, some of whom were publicly employed HCPs. Several expenses from the control account were booked improperly as ‘promotional expenses’ and ‘sales development’ expenses. In connection with these improper transactions, THC Saudi earned approximately $1,960,000 in gross profit.”

As to Turkey, the Statement of Facts state as follows.

“[Between 2001 and 2006] SigInt [a division of M/A-Com, an indirect, wholly owned subsidiary of Tyco] products were sold through a sales representative to government entities in Turkey. The sales representatives sold the SigInt equipment in Turkey at an approximately twelve to forty percent mark-up over the price at which he purchased the equipment from M/A-Com and also received a commission on one of the sales. The sales representative transferred part of his commission and part of his mark-up to a government official in Turkey to obtain orders. In connection with these improper transactions, M/A-Com earned approximately $71,770 in gross proft.”

The Statement of Facts also states as follows.

“[Between 2004 and 2009] Erhard [a subsidiary of Tyco Waterworks Deutschland GmBH (TWW Germany), an indirect wholly owned subsidiary of Tyco] made payments in the amount of approximately $2,371,094 to at least thirteen of its sales agents in China, Croatia, India, Libya, Saudi Arabia, Serbia, Syria, and the United Arab Emirates for the purpose of making payments to employees of government customers, and improperly booked the payments as ‘commissions.’ In connection with these improper transactions, TWW Germany earned approximately $4,684,966 in gross profits.”

In the NPA, Tyco admitted, accepted and acknowledged responsiblity for the above conduct and agreed not to make any public statement contradicting the above conduct.

The NPA has a term of three years and states as follows.

“The Department enters into this Non-Prosecution Agreement based, in part, on the following factors: (a) the Company’s timely, voluntary, and complete disclosure of the conduct; (b) the Company’s global internal investigation concerning bribery and related misconduct; (c) the Company’s extensive remediation, including the implementation of an enhanced compliance program, the termination of employees responsible for the improper payments and falsification of books and records, severing contracts with the responsible third-party agents, the closing of subsidiaries due to compliance failures, and the agreement to undertake further compliance enhancements ….; and (d) the Company’s agreement to provide annual, written reports to the Department on its progress and experience in monitoring and enhancing its compliance policies and procedures …”.

Pursuant to the NPA, the company agreed to pay a penalty of $13.68 million (the $2.1 million TVC ME agreed to pay pursuant to the plea agreement is included in this figure). Pursuant to the NPA, Tyco also agreed to a host of compliance undertakings and agreed to report to the DOJ (at no less than 12 month intervals) during the three year term of the NPA regarding “remediation and implementation of the compliance program and internal controls, policies, and procedures” required pursuant to the NPA.

In this DOJ release, Assistant Attorney General Lanny Breuer stated as follows. “Together with the SEC, we are leading a fight against corruption around the globe.”

SEC

In a related enforcement action, the SEC brought a civil complaint (here) against Tyco.

The introductory paragraph of the complaint states as follows. “This matter concerns violations by Tyco of the books and records, internal controls, and anti-bribery provisions of the FCPA.”

The complaint then states as follows.

“In April 2006, the Commission filed a settled accounting fraud, disclosure, and FCPA injunctive action against Tyco, pursuant to which the company consented to entry of a final judgment enjoining it from violations of the anti-fraud, periodic reporting, books and records, internal controls, proxy disclosure, and anti-bribery provisions of the federal securities laws and ordering it to pay $1 in disgorgement and a $50 million civil penalty. The U.S. District Court for the Southern District of New York entered the settled Final Judgment against Tyco on May 1, 2006. At the time of settlement, Tyco had already committed to and commenced a review of its FCPA compliance and a global, comprehensive internal investigation of possible additional FCPA violations. As a result of that review and investigation, certain FCPA violations have come to light for which the misconduct occurred, or the benefit to Tyco continued, after the 2006 injunction. Those are the violations that are alleged in this Complaint. [...] The FCPA misconduct reported by Tyco showed that Tyco’s books and records were misstated as a result of at least twelve different, post-injunction illicit payment schemes occurring at Tyco subsidiaries across the globe. The schemes frequently entailed illicit payments to foreign officials that were inaccurately recorded so as to conceal the nature of the payments. Those inaccurate entries were incorporated into Tyco’ s books and records. Tyco also failed to devise and maintain internal controls sufficient to provide reasonable assurances that all transactions were properly recorded in the company’s books, records, and accounts. [...] As reflected in this Complaint, numerous Tyco subsidiaries engaged in violative conduct, the conduct was carried out by several different methods, and the conduct occurred over a lengthy period of time and continued even after the 2006 injunction. Through one of the illicit payment schemes, Tyco violated the FCPA anti-bribery provisions. Specifically, through the acts of its then-subsidiary and agent, TE M/A-Com, Inc. Tyco violated [the FCPA's anti-bribery provisions] by corruptly making illicit payments to foreign government officials to obtain or retain business.”

As to the SEC’s anti-bribery charge based on the conduct of TE M/A-Com, Inc. the complaint alleges that M/A Com retained a New York sales agent who made illicit payments in connection with a 2006 sale of microwave equipment to an instrumentality of the Turkish government. The complaint alleges that “employees of M/A-Com were aware that the agent was paying foreign government customers to obtain orders” and cites an internal e-mail which states as follows – “hell, everyone knows you have to bribe somebody to do business in Turkey.” The complaint then alleges as follows. “Tyco exerted control over M/A-COM in part by utilizing dual roles for its officers. At the time of the September 2006 transaction, four high-level Tyco officers were also officers of M/A-COM, including one who was M/A-COM’s president. Additionally, one of those Tyco officers served as one of five members of M/A-COM’s board of directors. While there is no indication that any of these individuals knew of the illegal conduct described herein, through the corporate structure used to hold M/ A-COM and through the dual roles of these officers, Tyco controlled M/A-COM. As a result, M/A-COM was Tyco’s agent for purposes of the September 2006 transaction, and the transaction was squarely within the scope of M/ACOM’s agency. The benefit obtained by Tyco as a result of the September 2006 deal was $44,513.”

The SEC’s complaint contains substantially similar allegations compared to the NPA Statement of Facts. In addition, the SEC complaint alleges additional improper conduct in Malaysia, Egypt, and Poland.

As to Malaysia, the complaint alleges as follows.

“[Between 2000 to 2007] TFS Malaysia [an indirect wholly owned subsidiary of Tyco] used intermediaries to pay the employees of its customers when bidding on contracts. Payments were made to approximately twenty-six employees of customers, and one of those payees was an employee of a government-controlled entity. TFS Malaysia inaccurately described these expenses as ‘commissions’ and failed to maintain policies sufficient to prohibit such payments. As a result, Tyco’s books and records were misstated. Tyco’s benefit as a result of these illicit payments was $45,972.”

As to Egypt, the complaint alleges as follows.

“[Between 2004 to 2008] an Egyptian agent of TFIS UK [a indirect wholly owned subsidiary] wired approximately $282,022 to a former employee’s personal bank account with the understanding that the money would be used in connection with entertainment expenses for representatives of a company majority-owned by the Egyptian government. A portion of the funds was used to pay for lodging, meals, transportation, spending money, and entertainment expenses for that company’s officials on two trips to the United Kingdom and two trips to the U.S. TFIS UK made payments pursuant to inflated invoices submitted by the company’s Egyptian agent, who wired funds to the former employees to be used to entertain foreign officials. TFIS U.K. books and records did not accurately reflect TFIS’s U.K.’s understanding that the funds would be used for entertainment of government officials, and TFIS UK did not maintain sufficient internal controls over its payments to agents. As a result, Tyco’s books and records were misstated. Tyco’s benefits as a result of these illicit payments was $1,589,374.”

As to Poland, the complaint alleges as follows.

“[Between 2005 to 2007] THC Polska [an indirect wholly owned subsidiary] used ‘service contracts’ to hire public healthcare professionals in Poland for various purposes, including conducting training sessions, performing clinical studies, and distributing marketing materials. Approximately five such service contracts involved falsified records and approximately twenty-six other service contracts involved incomplete and inaccurate records, including some related expenses paid by THC Polska to family members of healthcare professionals. As a result, Tyco’s books and records were misstated. In connection with the transactions related to these inaccurate books and records, Tyco’s benefit was approximately $14,673.

As to the SEC’s internal controls charge, the complaint contains the following allegation. “Tyco failed to devise and maintain … a system of internal controls and was therefore unable to detect the violations … Numerous Tyco subsidiaries engaged in violative conduct, the conduct was carried out by several different methods, and the conduct occurred over a lengthy period of time, and it continued even after the 2006 injunction.”

The SEC complaint contains the following paragraph.

“As its global review and investigation progressed, Tyco voluntarily disclosed this conduct to the Commission and took significant, broad-spectrum remedial measures. Those remedial measures include: the initial FCPA review of every Tyco legal operating entity ultimately including 454 entities in 50 separate countries; active monitoring and evaluation of all of Tyco’s agents and other relevant third-party relationships; quarterly ethics and compliance training by over 4,000 middle-managers; FCPA-focused on-site reviews of higher risk entities; creation of a corporate Ombudsman’s office and numerous segment-specific compliance counsel positions; exit from several business operations in high-risk areas; and the termination of over 90 employees, including supervisors, because of FCPA compliance concerns.”

As noted in this SEC release, Tyco consented to a final judgment that orders the company to pay approximately $10.5 million in disgorgement and approximately $2.6 million in prejudgment interest. Tyco also agreed to be permanently enjoined from violating the FCPA.

In this release, SEC Associate Director of Enforcement Scott Friestad stated as follows. “Tyco’s subsidiaries operating in Asia and the Middle East saw illicit payment schemes as a typical way of doing business in some countries, and the company illictly reaped substantial financial benefits as a result.”

First it was Johnson & Johnson (see here – $70 million in combined fines and penalties in April 2011). Then it was Smith & Nephew (see here - $22 million in combined fines and penalties in February 2012). Then it was Biomet (see here – $22.8 million in combined fines and penalties in March 2012). The latest Foreign Corrupt Practices Act enforcement based on the enforcement theory that various foreign health care providers are “foreign officials” is Pfizer / Wyeth (an entity acquired by Pfizer in 2009).

Total fines and penalties in the Pfizer / Wyeth enforcement action are approximately $60 million ($15 million via a DOJ deferred prosecution agreement, and $45 million via separate settled SEC civil complaints against Pfizer and Wyeth). This post goes long and deep as to the DOJ’s and SEC’s allegations and resolution documents (approximately 100 pages in total).

The criminal information begins with a description of Pfizer HCP and notes that during the relevant time period it “operated in several international markets through representative officers, including offices in Bulgaria, Croatia, and Kazakhstan, as well as through contracts with Russian distributors and employees of a representative officer of Pfizer HCP’s parent company in Moscow (‘Pfizer Russia’).” According to the information, “books and records of Pfizer HCP … were consolidated into the books and records of Pfizer for purposes of preparing Pfizer’s year-end financial statements” filed with the SEC.

The information alleges, in summary fashion, as follows.

“The manufacture, registration, distribution, sale, and prescription of pharmaceuticals were highly-regulated activities throughout the world. While there were multinational regulatory schemes, it was typical that each country established its own regulatory structure at a local, regional, and/or national level. These regulatory structures generally required the registration of pharmaceuticals and regulated labeling and advertising. Additionally, in certain countries, the government established lists of pharmaceuticals. that were approved for government reimbursement or otherwise determined those pharmaceuticals that might be purchased by government institutions. Moreover, countries often regulated the interactions between pharmaceutical companies and hospitals, pharmacies, and healthcare professionals. In those countries with national healthcare system, hospitals, clinics, and pharmacies were generally agencies or instrumentalities of foreign governments, and, thus, many of the healthcare professionals employed by these agencies and instrumentalities were foreign officials within the meaning of the FCPA. During the relevant period, for the purpose of improperly influencing foreign officials in connection with regulatory and formulary approvals, purchase decisions, prescription decisions, and customs clearance, employees of Pfizer HCP and Pfizer Russia made and authorized the making of payments of cash and the provision of other things of value both directly and through third parties. Funds for these payments were often generated by employees of Pfizer HCP and Pfizer Russia through the use of collusive vendors to create fraudulent invoices.”

The information charges two counts: (i) conspiracy to violate the FCPA’s anti-bribery and books and records provisions and (ii) substantive FCPA anti-bribery violations. The conduct at issue took place between 1997 and 2006 and focuses on payments to alleged “foreign officials” as listed below “in exchange for improper business advantages for Pfizer HCP, including the approval of pharmaceutical products and increased sales of pharmaceutical products.”

Croatian Official (a citizen of the Republic of Croatia who held official positions on government committees in Croatia and had influence over decisions concerning the registration and reimbursement of Pfizer products marketed and sold in the country).

Russian Official 1 (a citizen of the Russian Federation who was a medical doctor employed by a public hospital who had influence over the Russian government’s purchase and prescription of Pfizer products marketed and sold in the country).

Russian Official 2 (a citizen of the Russian Federation who was a high-ranking government official who held official positions on government committees in Russia and had influence over decisions concerning the reimbursement of Pfizer products marketed and sold in the country).

Russian Official 3 (a citizen of the Russian Federation who had influence over decisions concerning the treatment algorithms involving Pfizer products marketed and sold in the country).

In addition to the above alleged “foreign officials” the information describes “other foreign officials in various countries, including Bulgaria, Croatia, Kazakhstan and Russia.”

Under the heading “Manners and Means of the Conspiracy” the information alleges as follows.

“Pfizer HCP through its employees and agents agreed to make improper payments and provide benefits (including kickbacks, cash payments, gifts, entertainment and support for domestic and international travel) to numerous government officials, including physicians, pharmacologists and senior government officials, who were employed by foreign governments or instrumentalities of foreign governments, including in Bulgaria, Croatia, Kazakhstan, and Russia. During the relevant time period, Pfizer HCP, through its employees and agents, corruptly authorized the payment, directly or indirectly, of at least $2,000,000 to intermediary companies, government officials, and others, to corruptly induce the prescription and purchase of Pfizer products and to obtain regulatory approvals for Pfizer products. Pfizer HCP through its employees falsely recorded the improper transactions by booking them in a variety of ways, including as educational or charitable support, “Travel and Entertainment,” “Convention and Trade Meetings and Conferences,” “Distribution Freight,” “Clinical Grants/Clinical Trials,” “Gifts,” and “Professional Services —Non Consultant,” in order to conceal the improper nature of the transactions in the books and records of Pfizer HCP.”

As to “Corrupt Payments in Bulgaria” the information alleges as follows.

“On or about January 24, 2003, a District Manager in Pfizer HCP’s representative office in Bulgaria (“Pfizer HCP Bulgaria”) sent an email to his subordinates that discussed marketing programs and “various possibilities to stimulate the prescribers” and instructed them to give individual doctors employed in Bulgarian public hospitals “a specific target as to how many packs (or new patients) per month he should achieve” and then provide support for international travel on the basis of the promises to prescribe made by the doctors. On or about October 14, 2003, a Pfizer HCP Bulgaria sales department manager sent an electronic message to multiple sales representatives containing instructions for submitting sponsorship requests. The manager wrote, “[e]ach representative wanting to sponsor someone …must very precisely state the grounds for recommending the sponsorship, and also what the doctor in question is expected to do or has already done (which is the better option).”

As to “Corrupt Payments in Croatia” the information alleges as follows.

“On or about July 9, 2003, employees of Pfizer HCP’s representative office in Croatia (“Pfizer HCP Croatia”) caused a wire transfer of $1,200 to be made from a bank account in Belgium to an account in Austria controlled by Croatian Official, which wire transfer was part of more than $85,000 paid to Croatian Official between 1997 and 2003, and which was for a purpose described by the country manager as follows: “as [Croatian Official] is a member of the Registration Committee regarding pharmaceuticals, I do expect that all products which are to be registered, will pass the regular procedure by his assistance. On or about February 18, 2004, a Pfizer HCP Croatia sales representative drafted a memorandum reporting on her discussions with doctors at Croatian public hospitals regarding bonus agreements for purchases of a Pfizer product, which reflected an agreement with the chief doctor who promised purchases of the product in exchange for Pfizer HCP providing various things of value, including travel benefits and bonuses based on a percentage of sales.”

As to “Corrupt Payments in Kazakhstan” the information alleges as follows.

“On or about May 5, 2000, Pfizer HCP entered into an exclusive distribution contract for a Pfizer product with Kazakh Company [a Kazakh company that contracted with Pfizer HCP to provide distribution services and related services in the Republic of Kazakhstan] that was valued at a minimum of $500,000 believing that all or part of the value of the contract would be provided to a high-level Kazakh government official. On or about September 23, 2003, a regional supervisor responsible for Pfizer HCP’s representative office in Kazakhstan sent a memorandum to his supervisor memorializing a conversation held in Kazakhstan, in which he indicated that the controller of Kazakh Company was “very close to government officials,” and that Kazakh Company was likely responsible for Pfizer HCP’s past problems with the registration of a Pfizer product in Kazakhstan.”

As to “Corrupt Payments in Russia” the information alleges as follows.

“On or about September 8, -2003, a Pfizer Russia. employee emailed colleagues that a Russian government doctor, Russian Official 1, requested funds to attend a conference and, in return, “has pledged to prescribe at least 20 packs of [a Pfizer product] per month, and 20 [] packs [of another Pfizer product]. On or about November 19, 2003 in an invoice cover letter, a Pfizer Russia employee requested “payment for the (motivational) trip of [Russian Official 2] for the inclusion of [a Pfizer product] into the list … of medications refundable by the state” in order to influence Russian Official 2 to add the product to the regional formulary list. On or about April 7, 2004, a Pfizer Russia employee requested that a payment be made to a Russian government official “who took an active part in getting [a Pfizer product] into the bidding.” On or about July 26, 2004, a Pfizer Russia employee sent an email to his supervisors stating that Russia Company 1 [a Russian company that bid on tenders issued by Russian healthcare institutions and worked with Pfizer HCP and Pfizer Russia to fill tenders using Pfizer products] had won a tender for the use of a Pfizer product, and that Russian Company 1′s costs included “10% – Motivation of Officials.” On or about December 2, 2004, a Pfizer Russia employee requested sponsorship for a local department of health employee who was assisting the chief pharmacologist of a regional pediatric hospital, Russian Official 3, who was compiling algarithms for antibiotic therapy and wanted “to be financially compensated” for this work. The Pfizer Russia employee noted that, “in return for this,” the pharmacologist “will include our product’s in the treatment algorithms” to be used in government hospitals. On or about June 9, 2005, a Pfizer Russia employee sent an email to her supervisor stating that a cash payment had been made to an individual government doctor, which represented 5% of the value of the purchases of a Pfizer product made by a certain government hospital during the month of March 2005. On or about June 27, 2005, a Pfizer Russia employee emailed that a government doctor “should be assigned the task of stretching the amount of the purchases … to US $100 thousand” as an “obligation” in exchange for a trip to a conference in the Netherlands or Germany. On or about September 14, 2005, a Pfizer Russia employee emailed that an”agreement on cooperation” had been reached with a government doctor, and that Pfizer Russia’s requirements were the “purchase quantities,” and the government doctor’s requirement was “a trip to a conference.” In or around October 2005 through on or about December 8, 2005, Pfizer Russia caused payments totaling at least $69,000 to be made to Russian Company 2 [a Russian company that provided certain services to Pfizer HCP and Pfizer Russia, including making improper payments to Russian government officials and other companies on Pfizer HCP's behalf, in order to conceal the payments] with the understanding that the payments would be provided to individual Russian doctors employed in public hospitals, and that the payments represented 5% of the value of the purchases of Pfizer products in the doctors’ respective government hospitals. In or around October 2005, Pfizer Russia employees discussed how a regional distributor would provide Pfizer Russia with companies that have “neutral names,” to which Pfizer Russia could make improper payments that would be booked as conferences to provide benefits to government doctors.”

DPA

The DOJ’s charges against Pfizer HCP were resolved via a deferred prosecution agreement. Pursuant to the DPA, Pfizer HCP admitted, accepted and acknowledged “that it is responsible for the acts of its officers, employees and agents” as set forth in the information. As is customary in DOJ FCPA corporate enforcement actions, Pfizer HCP agreed not to make any public statement contradicting the acceptance of responsibility for the conduct set forth in the resolution documents.

The term of the DPA is two years and it states that the DOJ entered into the agreement based on the following factors: “(a) the extraordinary cooperation of Pfizer HCP’s parent company, Pfizer Inc., (“Pfizer”}, with the Department and the U.S. Securities and Exchange Commission (“SEC”), including thorough and responsive reporting of potential violations, including the conduct of other companies and individuals; (b) Pfizer’s initial voluntary disclosure of potential improper payments and the timely and complete disclosure of the facts [described in the DPA] as well as facts relating to potential improper payments in various countries that had been identified by its compliance program, internal audit function and global internal investigations concealing bribery and related misconduct; (c) the early and extensive remedial efforts undertaken by Pfizer, including the substantial and continuing improvements Pfizer has made to its global anticorruption compliance procedures; (d) Pfizer’s agreement to maintain an anti-corruption compliance program for all of its subsidiaries worldwide, including Pfizer HCP, to continue in its efforts to implement enhanced compliance measures [as required by the DPA] and to provide to the Department written reports on its progress and experience in maintaining and enhancing its compliance policies and procedures [as described in the DPA].”

Pursuant to the DPA, the advisory Sentencing Guidelines range for the conduct at issue was $22.8 – $45.6 million. The DPA specifically states that a downward departure “is warranted for substantial assistance in the investigation or prosecution of others.” The DPA then states as follows. ”The Government and Pfizer HCP agree that $15 million is the appropriate monetary penalty, which is a 34% reduction off the bottom of the recommended Guidelines fine range. Pfizer HCP and the Department agree that this fine is appropriate given the nature and extent of Pfizer’s voluntary, prompt and thorough disclosure of the misconduct at issue, the nature and extent of Pfizer’s extensive cooperation in this matter, Pfizer’s cooperation … in the Department’s investigation into other misconduct in the industry, and Pfizer’s extraordinary and ongoing remediation.”

Pursuant to the DPA, Pfizer’s HCP’s parent company, Pfizer, agreed that it will report to the DOJ during the term of the DPA regarding remediation and implementation of certain compliance measures required under the agreement.

The DPA contains a section titled “Origin of the Investigation and Cooperation with the authorities” and states as follows.

“In May 2004, Pfizer’s Corporate Compliance Division learned of potentially improper payments by the Croatian representative office of Pfizer HCP (“Pfizer HCP Croatia”). After conducting a preliminary investigation using external counsel, Pfizer made a voluntary disclosure to the Department and to the Commission. At the time, neither agency was aware of the allegations of improper payments or had any open investigation involving the overseas operations of Pfizer or any of its subsidiaries. From 2004 to the present, Pfizer, using external counsel and forensic accountants, internal Legal, Compliance, and Corporate Audit personnel, conducted an extensive, global review of its operations regarding allegations of improper payments to government officials and government doctors, including in Pfizer HCP markets and those of other Pfizer subsidiaries. This included a review of allegations that were identified by Pfizer’s own internal investigations and compliance controls, including its system of proactive FCPA reviews and enhanced audits. Pfizer reported to the Department and the Commission on the results of these investigations on a regular basis. At the request of the Department and the Commission, Pfizer agreed to periodically toll the statute of limitations on its own behalf and on behalf of its subsidiaries. In addition, starting immediately in 2004, Pfizer launched extensive remedial actions including: undertaking a comprehensive review of its compliance program, implementing enhanced anti-corruption compliance policies and procedures on a worldwide basis, developing global systems to support employee compliance with the enhanced procedures, adding FCPA-specific reviews to its internal audits, performing proactive anti-corruption compliance reviews in approximately ten markets annually, and conducting comprehensive anti-corruption training throughout the organization. Pfizer regularly reported to the Department and the Commission on these activities and sought their input concerning the scope and focus of these remedial activities.”

In a release (here) DOJ representatives stated as follows. “Pfizer took short cuts to boost its business in several Eurasian countries, bribing government officials in Bulgaria, Croatia, Kazakhstan and Russia to the tune of millions of dollars.” “Corrupt pay-offs to foreign officials in order to secure lucrative contracts creates an inherently uneven marketplace and puts honest companies at a disadvantage. Those that attempt to make these illegal backroom deals to influence contract procurement can expect to be investigated by the FBI and appropriately held responsible for their actions.”

SEC

The SEC enforcement action includes separate settled civil complaints against Pfizer and Wyeth.

Pfizer Complaint

The settled civil complaint (here) against Pfizer alleges, in summary, as follows.

“This action arises from violations of the books and records and internal controls provisions of the [FCPA by Pfizer] relating to improper payments made to foreign officials in numerous countries by the employees and agents of Pfizer’s subsidiaries in order to assist Pfizer in obtaining or retaining business. At various times from at least 2001 through 2007, employees and agents of subsidiaries of Pfizer, conducting business in Bulgaria, China, Croatia, Czech Republic, Italy, Kazakhstan, Russia, and Serbia, engaged in transactions for the purpose of improperly influencing foreign officials, including doctors and other healthcare professionals employed by foreign governments. These improper payments were variously made to influence regulatory and formulary approvals, purchase decisions, prescription decisions, and to clear customs. Employees in each of the involved subsidiaries attempted to conceal the true nature of the transactions by improperly recording the transactions on the books and records of the respective subsidiaries. Examples included falsely recording the payments as legitimate expenses for promotional activities, marketing, training, travel and entertainment, clinical trials, freight, conferences and advertising. These improper payments were made without the knowledge or approval of officers or employees of Pfizer, but the inaccurate books and records of Pfizer’s subsidiaries were consolidated in the financial reports of Pfizer, and Pfizer failed to devise and maintain an appropriate system of internal accounting controls.”

The SEC’s allegations concerning conduct in Bulgaria, Croatia, Kazakhstan and Russia are substantively similar to the DOJ’s allegations described above.

As to Russia, the SEC complaint contains the following additional allegations concerning customs related payments. “During the relevant period, Russian Federation customs officials would not clear pharmaceutical products for importation unless the importer provided an official certification indicating that the products conformed to the specific terms of the product registration and packaging requirements filed by the manufacturer with the Ministry of Health. The Russian government licensed a private certification company (the “Certification Center”) to perform this governmental function, which performed inspections and furnished the necessary certificates. In the spring of 2005, Pfizer Russia began to experience increasing difficulty in obtaining the necessary certificates because the Pfizer products did not conform to the precise terms of the product registration and packaging requirements filed with the Ministry of Health. On or about September or October 2005, a Certification Center employee proposed that the Certification Center would overlook the non-compliance of Pfizer Russia’s products in exchange for monthly payments of approximately $3,000. With the approval of the then-Pfizer Russia Country Manager, between October and December 2005 Pfizer Russia made payments of over $13,000 through an intermediary company, which then forwarded the payments to a company Pfizer Russia employees believed to be controlled by the Certification Center’s employees. The customs clearing problems ceased after Pfizer Russia started making payments, but they resumed when Pfizer Russia stopped the payments in 2006 after Pfizer began a Corporate Compliance review in Russia.”

As to conduct in China, the SEC alleges as follows as to Pfizer subsidiary Pfizer Investment Co. Ltd. (Pfizer China). “From at least 2003 through 2007, Pfizer China, through its employees and agents, provided cash payments, hospitality, gifts, and support for international travel to doctors employed by Chinese government healthcare institutions. The payments of cash and other things of value were intended to influence these government officials to prescribe Pfizer products, provide hospital formulary listing, and otherwise use their influence to grant Pfizer China an unfair advantage.” The SEC further alleged as follows. “Pfizer China employees took steps to conceal the true nature of the cash payments, gifts, and travel support made to Chinese government doctors by failing to accurately record the transactions.”

As to conduct in the Czech Republic, the SEC alleges as follows as to Pfizer subsidiary Pfizer spol. s.r.o. (Pfizer Czech). “From at least 2003 and through 2004, Pfizer Czech, through its employees and agents, provided support for international travel and recreational opportunities to doctors employed by the Czech government with the intent to influence these government officials to prescribe Pfizer products.” The SEC further alleged as follows. “Pfizer Czech employees took steps to conceal the true nature of these transactions, and failed to accurately record these transactions by falsely booking them as “Conventions and Trade Meeting,” among other false and misleading descriptions.”

As to conduct in Italy, the SEC alleges as follows as to Pfizer subsidiary Pfizer Italia S.r.l (Pfizer Italy). “From at least 2001 and continuing through early 2004, Pfizer Italy provided, directly or through vendors, cash payments, gifts, support for domestic and international travel, and other benefits to doctors employed by Italian government healthcare institutions. The payments of cash and other things of value were intended to influence these government officials to prescribe Pfizer products.” The SEC further alleged as follows. ”Pfizer Italy employees took steps to conceal the true nature of these transactions and failed to accurately record these transactions by falsely booking them as “Marketing Expenses,” “Professional Training,” and “Advertising in Scientific Journals,” among other false and misleading descriptions.”

As to conduct in Serbia, the SEC alleges as follows as to a representative office of Pfizer HCP (Pfizer HCP Serbia). “Pfizer HCP Serbia, through one of its sales representatives, paid for a government employed doctor to attend a conference in Chile in exchange for the doctor’s agreement to increase his department’s purchases of Pfizer products. Although Pfizer HCP Serbia management discovered the improper agreement and terminated the responsible sales representative, it still provided the support after the doctor threatened to spread negative information about Pfizer’s reputation as a company.”

Under the heading “accounting and internal controls” the SEC alleged as follows. “[F]our Pfizer subsidiaries engaged in transactions in eight countries which were intended to improperly influence foreign government officials in connection with regulatory and formulary approvals, purchase decisions, prescription decisions, and customs clearance. Through the four subsidiaries, Pfizer earned aggregate profits of $16,032,676 as a result of these improper transactions. [D]uring the relevant period the Pfizer subsidiaries recorded transactions associated with the improper payments in a manner that did not accurately reflect their true nature and purpose. The false entries in the subsidiaries’ books and records were consolidated into the books and records of Pfizer, which reported the results of its subsidiaries’ operations in its consolidated financial statements. [D]uring the relevant period Pfizer failed to devise and maintain an effective system of internal controls sufficient to prevent or detect the above-described conduct.”

Based on the above conduct, the SEC charged Pfizer with violating the FCPA’s books and records and internal control provisions.

The SEC complaint further notes as follows. “Pfizer made an initial voluntary disclosure of certain of these issues to the Commission and Department of Justice in October 2004, and thereafter diligently and thoroughly undertook a global internal investigation of its operations in no less than 19 countries, which identified additional potential violations, and regularly reported on the results of these investigations and fully cooperated with the staff of the Commission. Pfizer also undertook a comprehensive compliance review of its operations, enhanced its internal controls and compliance functions, engaged in significant disciplinary measures, and developed and implemented global FCPA compliance procedures, including the development and implementation of innovative proactive procedures, and sophisticated supporting systems.”

In addition, the SEC complaint contains a separate section titled “remedial efforts” that states as follows.

“Pfizer has taken extensive remedial actions including: undertaking a comprehensive worldwide review of its compliance program; implementing enhanced anti-corruption compliance policies and procedures on a worldwide basis; developing global systems to support employee compliance with the enhanced procedures; adding FCPA-specific reviews to its internal audits; performing innovative and proactive anti-corruption compliance reviews in approximately 10 markets annually; and conducting comprehensive anti-corruption training throughout the organization.”

Wyeth Complaint

The SEC also brought a settled civil complaint (here) against Wyeth LLC. According to the complaint, Wyeth was an issuer but in connection with its acquisition by Pfizer in October 2009, Wyeth delisted and became a wholly-owned subsidary of Pfizer.

The complaint alleges, in summary fashion, as follows. “This action arises from violations of the books and records and internal controls provisions of the [by Wyeth], while an issuer, relating to improper payments made to foreign officials in numerous countries by the employees and agents of Wyeth’s subsidiaries in order to assist Wyeth in obtaining or retaining business. During the time relevant to this Complaint, Wyeth was a pharmaceutical company engaged in business throughout the world, and an issuer as that term is used under the FCPA. At various times from at least 2005 through 2010, subsidiaries of Defendant Wyeth conducting business in several countries, including Indonesia, Pakistan, China, and Saudi Arabia, engaged in transactions for the purpose of improperly influencing foreign officials, including doctors and other healthcare professionals employed by foreign governments. Employees in each of the involved subsidiaries attempted to conceal the true nature of the transactions by improperly recording the transactions on the books and records of the respective subsidiaries. Examples include falsely recording the payments as legitimate expenses for promotional activities, marketing, training, travel and entertainment, conferences and advertising. These improper payments were made without the knowledge or approval of officers or employees of Wyeth, but the inaccurate books and records of Wyeth’s subsidiaries were consolidated in the financial reports of Wyeth, and Wyeth failed to devise and maintain an appropriate system of internal accounting controls. Certain of these payments were made following the acquisition of Wyeth by Pfizer Inc. (“Pfizer”) without the knowledge or approval of officers or employees of Pfizer, and the inaccurate books and records of Wyeth’s subsidiaries regarding those payments were consolidated in the financial reports of Pfizer.”

As to Indonesia, the complaint alleges as follows. “From at least 2005 until 2010, Wyeth Indonesia [an Indonesian company that was an indirect majority-owned subsidiary of Wyeth], through its employees and agents, provided cash payments and nutritional products to employees of Indonesian government-owned hospitals, including doctors employed by the Indonesian government. The cash payments and products were intended to influence the doctors’ recommendation of Wyeth nutritional products to their patients, to ensure that Wyeth products were made available to new mothers at the hospitals, and to obtain information about new births that could be used for marketing purposes.” The SEC further alleged as follows. ”Wyeth Indonesia employees also took steps to conceal the true nature of the transactions by inaccurately recording them as “Miscellaneous Expenses – Joint Promotions,” “Medical Education – Promo,” “Trade Allowances,” and “Miscellaneous Selling Expenses,” among other false and misleading descriptions.”

As to Pakistan, the complaint alleges as follows. “Starting at least in 2005 and continuing into 2009, Wyeth Pakistan [a Pakistani company that was an indirect majority-owned subsidiary of Wyeth] employees provided improper benefits to doctors who were employed by healthcare institutions owned or controlled by the Pakistani government. These improper benefits included cash payments, travel, office equipment and renovations, and were intended to influence the doctors to recommend Wyeth products to new mothers.” The SEC further alleged as follows. “Wyeth Pakistan employees and local management took steps to conceal the true nature of the transactions by inaccurately recording them as “Advertising and Sales Promotion,” “Film Show,” “Entertainment,” “Product Meetings,” and “Give Aways and Gifts,” among other false and misleading descriptions.”

As to China, the complaint alleges as follows. “From at least 2005 through 2010 and until the conduct was stopped by Pfizer, Wyeth China [a Chinese company that was an indirect majority-owned subsidiary of Wyeth], through its employees and agents, provided cash payments to Chinese state-owned hospitals and healthcare providers (including doctors, nurses, and midwives) employed by the Chinese government that were intended to influence the healthcare providers’ recommendation of Wyeth nutritional products to their patients, to ensure that Wyeth products were made available to new mothers at the hospitals, and to obtain information about new births that could be used for marketing purposes.” The SEC further alleged as follows. “Wyeth China employees took steps to conceal the true nature of the payments by falsifying expense reimbursement requests and, in concert with local travel agencies, by submitting false or inflated invoices and other supporting documentation for large-scale consumer education events, resulting in those transactions being falsely recorded in Wyeth China’s books and records.

As to Saudi Arabia, the complaint alleges as follows. “In June 2007, the local distributor, at the direction of Wyeth Saudi Arabia [a Delaware corporation that operated a representative office in Saudi Arabia], made a cash payment to a Saudi Arabian customs official to secure the release of a shipment of promotional items that were to be used in connection with the marketing and sale of Wyeth’s nutritional products. These promotional items were held in port because Wyeth Saudi Arabia had failed to secure a required Saudi Arabian Standards Organization Certificate of Conformity. In July 2007, Wyeth Saudi Arabia reimbursed the distributor for this cash payment and improperly recorded it as a “facilitation expense” in its books and records.”

Under the heading ”accounting and internal controls,” the SEC alleged as follows. ”Wyeth Indonesia, Wyeth Pakistan, and Wyeth China engaged in transactions which were intended to improperly influence foreign government officials. Through these three subsidiaries Wyeth earned aggregate profits of approximately $17,217,831 as a result of these improper transactions. [...] During the relevant period, the Wyeth subsidiaries recorded transactions associated with the improper payments in a manner that did not accurately reflect their true nature and purpose. False entries in the subsidiaries’ books and records were consolidated into the books and records of Wyeth, which reported the results of its subsidiaries’ operations in its consolidated financial statements. [...] During the relevant period, Wyeth failed to devise and maintain an effective system of internal controls sufficient to prevent or detect the above-described conduct.

Based on the above conduct, the SEC charged Wyeth with violations of the FCPA’s books and records and internal control provisions.

The SEC complaint notes as follows. “Following Pfizer’s acquisition of Wyeth, which was finalized on or about October 15, 2009, Pfizer undertook a risk-based FCPA due diligence review of Wyeth’s global operations and reported the results of that diligence review to the Commission staff within 180 days of the closing. Pfizer’s post-acquisition review identified potential improper payments, and it diligently and thoroughly undertook a global internal investigation of Wyeth’s operations and voluntarily disclosed the results to the Commission staff, which included identifying improper payments made by Wyeth’s Nutritional Products Division in Indonesia, Pakistan, China, and Saudi Arabia, as well as additional improper payments made by other Wyeth subsidiaries. Following the acquisition, Pfizer diligently and promptly integrated Wyeth’s legacy operations into its compliance program and cooperated fully with the Commission staff.”

In this SEC release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) states as follows. “Pfizer subsidiaries in several countries had bribery so entwined in their sales culture that they offered points and bonus programs to improperly reward foreign officials who proved to be their best customers. These charges illustrate the pitfalls that exist for companies that fail to appropriately monitor potential risks in their global operations.”

As noted in the SEC release, in settling the charges Pfizer and Wyeth neither admitted nor denied the allegations. The release states as follows. “Pfizer consented to the entry of a final judgment ordering it to pay disgorgement of $16,032,676 in net profits and prejudgment interest of $10,307,268 for a total of $26,339,944. [Pfizer] also is required to report to the SEC on the status of its remediation and implementation of compliance measures over a two-year period, and is permanently enjoined from further violations” of the FCPA’s books and records and internal control provisions. “Wyeth consented to the entry of a final judgment ordering it to pay disgorgement of $17,217,831 in net profits and prejudgment interest of $1,658,793, for a total of $18,876,624. As a Pfizer subsidiary, the status of Wyeth’s remediation and implementation of compliance measures will be subsumed in Pfizer’s two-year self-reporting period. Wyeth also is permanently enjoined from further violations” of the FCPA’s books and records and internal control provisions.

Brett Campbell and Peter Clark (Cadwalader, Wickersham & Taft – here and here) represented Pfizer. Clark is a former head of the DOJ’s FCPA enforcement program.

April Fool’s Day is a day traditionally full of practical jokes and pranks.

Thus, it is only fitting that on April 1st U.S. District Court Richard Leon will hold a hearing on the Daimler FCPA enforcement action during which he is expected to approve a DOJ – Daimler brokered deferred prosecution agreement and other various aspects of the settlement discussed below.

If so, one pillar which contributes to the “facade of FCPA enforcement” (more on that in a future post) – bribery, yet no bribery – will have a new poster-child in addition to the Siemens and BAE bribery, yet no bribery FCPA enforcement actions (see here for prior Siemens posts and here for prior BAE posts).

At least, Siemens and BAE pleaded guilty to something - even if that something was not an FCPA antibribery charge.

The Daimler enforcement action appears to take the “facade” one step further in that Daimler will not have to plead guilty to anything … zero … zilch.

Rather, Daimler will agree to a deferred prosecution agreement despite clear evidence (per the DOJ’s own allegations as set forth below) of FCPA antibribery violations.

One can legitimately ask, what did Innospec Inc. and Control Components, Inc. (two companies that recently pleaded guilty to FCPA antibribery violations) do that Daimler also didn’t do?

In other words, it sure looks and feels like two junior, indirect subsidiaries are being offered up as “sacrificial corporate lambs” to take the fall for the more significant, powerful parent.

The end result is that the DOJ can boast it secured two FCPA antibribery pleas while allowing Daimler to say that it never violated the FCPA’s antibribery provisions, thus allowing Daimler to escape debarment in Europe – a factor clearly at issue in this enforcement action as highlighted below.

Yet another instance of bribery, yet no bribery is not the only reason why the Daimler enforcement action contributes to the facade of FCPA enforcement.

In addition, wrapped into allegations which clearly establish all the elements of an FCPA antibribery violation, are numerous dubious and untested theories of FCPA liability.

Most notably, the entire criminal information against DaimlerChrysler China Ltd. (“DCCL”) is premised, as so many recent FCPA enforcement actions are, on employees of alleged Chinese state-owned entities (companies doing business all over the world and companies with publicly traded stock) being “foreign officials” under the FCPA. As in other FCPA enforcement actions, the allegations as to these entities are bare-bones, uninformative, and replete with legal conclusions as to why these entities are “instrumentalities” of a foreign government.

Because these dubious and untested theories of FCPA liability are embedded into the much larger bribery, yet no bribery charges against Daimler which are being resolved through a deferred prosecution agreement, these dubious and untested theories will once again escape judicial scrutiny.

Because of the general lack of substantive FCPA case law, the entire Daimler enforcement action (including theories of liability premised on the dubious and untested legal theories) will once again be viewed as de facto FCPA case law.

The Daimler bribery, yet no bribery enforcement action is wide in scope and allegations of improper conduct go all the way up to senior levels of the company. The “things of value” are numerous, the “foreign officials” include bona fide government officials (as well as the dubious “foreign officials” referenced above) and the amount of business allegedly obtained or retained through bribery and corruption is in the hundreds of millions.

The countries in which the payments were allegedly made are numerous (in fact, the label function at the bottom of this post only allows so many characters and I was unable to separately label each country in which the alleged improper payments occurred).

The alleged improper payments involved dozens and dozens of third parties, including several located in the U.S., which were allegedly utilized by Daimler and its affiliates to bribe foreign officials. Given Daimler’s use of numerous U.S. based entities, it will be interesting to see if any of these U.S. entities and/or entity employees will be prosecuted for their role in the respective bribery schemes.

The Daimler bribery, yet no bribery case involves involves ineffective internal controls, lack of effective third-party due diligence, and intentional misrecording of bribe payments on Daimler’s books and records (and those of its affiliates).

Yet in another interesting twist, Daimler also escapes criminal charges for knowingly failing to implement effective internal controls, even though the DOJ’s own allegations would seem to support such a charge. (Even Siemens plead guilty to both criminal books and records and internal controls charges).

This a long post.

However, the more that is known about the Daimler FCPA enforcement action and the more that is understood about the facade of FCPA enforcement, the greater the chance the facade of FCPA enforcement will be exposed and addressed.

It all starts with the person standing between the DOJ and Daimler and that is Judge Richard Leon and he would be doing a great public service by rejecting the proposed settlement and injecting the “rule of law” into the current facade of FCPA enforcement.

This post details the Daimler criminal information, the Daimler deferred prosecution agreement, the three separate criminal informations against Daimler subsidiaries, and the DOJ omnibus sentencing memorandum.

The Daimler AG Bribery, Yet No Bribery Allegations

According to the criminal information (see here) filed against Daimler AG (and the Statement of Facts in the below described deferred prosecution agreement), the company “engaged in a long-standing practice of paying bribes to ‘foreign officials’ as that term is defined in the FCPA … through a variety of mechanisms, including the use of corporate accounts [such as cash desks], offshore bank accounts, deceptive pricing arrangements, and third-party intermediaries.”

In summary fashion, the information charges that “between 1998 and January 2008, Daimler made hundreds of improper payments worth tens of millions of dollars to foreign officials in at least 22 countries – including China, Croatia, Egypt, Greece, Hungary, Indonesia, Iraq, Ivory Coast, Latvia, Nigeria, Russia, Serbia and Montenegro, Thailand, Turkey, Turkmenistan, Uzbekistan, Vietnam, and others – to assist in securing contracts with government customers for the purchase of Daimler vehicles valued at hundreds of millions of dollars.”

According to the information, “in some cases, Daimler wired these improper payments to U.S. bank accounts or to the foreign bank accounts of U.S. shell companies in order to transmit the bribe.” The information alleges that “in at least one instance, a U.S. shell company was incorporated for the specific purpose of entering into a sham consulting agreement with Daimler in order to conceal improper payments routed through the shell company to foreign government officials.” According to the information “certain improper payments even continued as late as January 2008.” The information charges that “in all cases, Daimler improperly recorded these payments in its corporate books and records.”

Despite being a German company, the information charges that “as a result of Daimler’s filing of periodic reports with the SEC, and Daimler’s use of U.S. bank accounts and U.S. companies in transacting certain business with foreign governments and officials, the company is subject to the FCPA.”

According to the information, “Daimler’s longstanding violations of the FCPA resulted from a variety of factors, including: (1) an inadequate compliance structure; (2) a highly decentralized system of selling vehicles through a myriad of foreign sales forces, subsidiaries, and affiliates, with no central oversight; (3) a corporate culture that tolerated and/or encouraged bribery; and (4) the involvement of certain key executives, such as the then head of its overseas sales division (“DCOS”), the then head of internal audit, and the then CEO’s of several subsidiaries and affiliates.”

According to the information, “in total, the corrupt transactions with a territorial connection to the United States resulted in over $50,000,000 in pre-tax profits for Daimler.”

The information alleges improper conduct at the highest levels of the country. For instance, in 1999 during a Daimler “Board of Management meeting, Daimler’s then head of internal audit proposed that the company adopt an integrity code that included anti-bribery provisions …” However, the information charges that “participants in the meeting discussed that adopting such policies (and stopping the practice of making ‘useful payments’) would result in Daimler losing business in certain countries.” Even though the company did adopt “an integrity code with anti-bribery provisions” at the meeting, the information charges that Daimler, among other things, “failed to make sufficient efforts to enforce the code, train employees on compliance with the FCPA or other applicable anti-bribery statutes” or “otherwise attempt to ensure that the company was not continuing to make improper payments in order to obtain or retain government business overseas.”

Elsewhere, the information charges that “in or about 2000 or 2001″ “Daimler’s internal audit department was aware that Daimler employees had made and could make bribe payments” and that the department drafted a document identifying 14 separate improper payment mechanisms. According to the information, the same document noted that “payment of ‘useful expenditures’ through these methods was subject to criminal prosecution in countries such as the United States.” However, the document also noted the “level of difficulty” law enforcement authories would have in “proving corruption carried out through the various methods.”

The Daimler information, as to conduct in Russia, China, and Croatia, contains the same substantive allegations as set forth in the separate criminal informations against DCAR, ETF, and DCCL (described more fully below).

Vietnam

As to Vietnam, the information charges that “Daimler employees working at Mercedes Benz Vietnam (“MBV”) made improper payments and provided gifts and other things of value to Vietnamese government officials in exchange for business from Vietnamese government owned and controlled customers.” According to the information, “these improper payments were routinely paid to government officials through broker commissions” and the payments were “improperly categorized as broker commissions, cost of goods sold, and/or gifts” in MBV’s books and records.

The information states that between “2000 and 2005, MBV was majority owned (70%) and controlled by Daimler through its subsidiary Daimler Benz Vietnam Investments Singapore Pte. Ltd., which Daimler wholly owned from June 30, 2003 through 2006.” The information further states that “although a Vietnamese government entity, Saigon Auto Corp., was a minority owner (30%) of MBV” and that “MBV was managed primarily by German Daimler employees.”

According to the information, the “foreign official” recipients of the improper payments included employees of Saigon Passenger Transport Company (“Saigon Bus”) (see here), an alleged “instrumentality” of the Vietnamese government and “Vietnamese government officials in the Ministry of Public Security.”

The information alleges that “MBV agreed to make the improper payments to the Saigon Bus official through” an account of Trading & Investment Houston, a U.S. based entity. The information also alleges that during negotiations of the Saigon Bus deal, “a Vietnamese government official with the government-owned Saigon High Tech Park suggested that MBV make a contribution [approximately $22 million over a five yeard period] to the high tech park as a condition of Daimler and MBV winning the business contract.”

The information also alleges that in connection with the 2004 Asia Europe Meeting (“ASEM 5″), “Vietnamese government officials sought to obtain 78 Mercedes Benz passenger cars in order to transport officials attending the conference.” According to the information, MBV “agreed to lend the vehicles to the Vietnamese government free of charge” and that in exchange “the Vietnamese government allowed MBV to import these 78 completely assembled passenger cars into Vietnam at a tariff rate of only 25%, when the standard tariff rate for completely assembled vehicles was 100%.” According to the information, following the conference, when MBV sold the vehicles, it was thus able to make a “much higher profit, approximately €1.65 million, because of the lower tariff costs.”

According to the information, “the making of [these] improper payments was known about and encouraged at the highest levels of the former MBV management.”

Turkmenistan

As to Turkmenistan, the information alleges that Daimler, and its Vienna based distributor (IPC) delivered to high-level Turkmen government officials various gifts, including “an armored Mercedes Benz S-class passenger car, valued at more than €300,000 for his birthday.” According to the information, “neither the Turkmen Government Official nor the Turkmen government paid for the vehicle” but that Daimler affiliate employees “agreed to provide this birthday gift to the Turkmen Government Official with the expectation that [Daimler] would receive large contracts for the purchase of vehicles by the Turkmenistan government in the coming year.”

Nigeria

As to Nigeria, the information focuses on the conduct of Anambra Motor Manufacturing Company (“Anammco”), “a joint venture between Daimler and the Nigerian government” that Daimler utilized to sell vehicles into Nigeria. According to the information, “Daimler owned 40% of Anammco and controlled Anammco, inter alia, through Anammco’s then managing director, who was a German expatriate and dual employee of both Daimler and Anammco.”

According to the information, “Daimler entered into a contract to sell vehicles to the Nigerian State House, which was also known as the Nigerian Presidential Complex, and was the office and residence of the Nigerian President (the ‘State House Contract’) and that pursuant to this contract, Daimler charged “the State House approximately 21% over the wholesale price for the vehicles, parts, and services.” According to the information, “in connection with these sales to the State House, Daimler made €1,427,242 in improper commission payments … with the understanding that these funds would be passed on, in whole or in part, to Nigerian officials to secure the State House Contract.”

The information also charges that Daimler made improper payments to high-level executive branch officials in Nigeria in connection with the State House Contract; that Anammco entered into contracts worth $4.6 million with Savannah Sugar Company Ltd. (an alleged instrumentality of the Nigerian government) to supply Daimler vehicles, spare parts, and tools on which approximately €554,396 in “consultant” payments were made; and that “Daimler entered into a contract with the Nigerian Police Force” in which Anammco requested that Daimler make payment to a member of the Nigerian Police Force in his German bank account.

The information also alleges that Daimler made various payments to Nigerian government officials in connection with selling “54 buses to the Nigerian Ministry of Industry” to provide transport for the World Youth Championship games held in Nigeria. The informatin further alleges that Anammco agreed to provide $500,000 in support of the “All-Africa Games” and that Anammco supplied numerous vehicles for the games, but that the Nigeria organizing committee for the games did not pay for the vehicles.

Finally, the information charges that Daimler’s wholly-owned subsidiary in Brazil utilized the services of an entity owned by a senior Nigerian diplomat in Brazil and his wife to help facilitate the sale of buses to a Nigerian state and that approximately $60,000 in commission payments were paid to the Nigerian diplomat.

Ivory Coast / West Africa

As to the Ivory Coast and West Africa, the information states that “from at least 1992 to 2007, Daimler sold passenger cars in the Ivory Coast and other West African countries through its majority owned (89%) and controlled subsidiary, Star Auto S.A. (“Star Auto”)” and that Star Auto made direct sales of Daimler passenger cars to various government customers in West Africa, including government ministries, the military, and government agencies, including for use by diplomats and heads of state.” In connection with these sales, Daimler employees “authorized and made improper payments to government officials at its customers in the Ivory Coast and elsewhere in West Afria…”

Among other conduct, the information alleges that commission payments were made to an entity that would pass on, in whole or in part, the payments to Ghanaian Army officials in connection with a contract to sell trucks to the Army of Ghana, and that Daimler, to assist in securing a contract to provide trucks to an Indonesian firm operating a logging project in Liberia, “gave a then senior executive branch official of Liberia a gift of an armored Mercedes passenger car worth approximately €267,000.”

Latvia

As to Latvia, the information charges that EvoBus GmbH (“EvoBus”), a wholly-owned subsidiary of Daimler and part of a Daimler business unit called Daimler Buses, paid approximately €1,800,000 in ‘commision’ payments to third parties with the understanding that such improper payments would be passed on, in whole or in part, to Latvian government officials to influnce the award of contracts to EvoBus.” According to the information, the contracts were awarded by the Riga City Council Traffic Department and EvoBus paid bribes to members of the Riga City Council. To make these “commission payments and to disguise their true nature and purpose” the information charges that “EvoBus entered into sham consulting contracts with, among others, two U.S. based entities: Oldenburgh Financial Corporation, incorporated in Delaware, and United Petrol Group LLP, incorporated in Oregon.”

Austria / Hungary

As to Austria and Hungary, the information charges that, to help facilitate the sale of 32 used buses to a state-owned regional public transport company in Hungary, EvoBus Austria GmbH agreed to pay a “commission of €333,370 to a U.S. based corporation called USCON Ltd. with the understanding that the payment would be passed on, in whole or in part, to Hungarian government officials.”

Turkey

As to Turkey, the information charges that Daimler’s Corporate Audit Department “discovered three binders located in a safe at MB Turk’s [a Daimler subsidiary in Turkey] offices in Istabul” that, along with other evidence, demonstrated that “MB Turk made approximately €6.05 million in payments to third parties in connection with vehicle export transactions that involved the sale of vehicles to non-Turkish government customers in North Korea, Latvia, Bulgaria, Libya, Romania, Russia, Saudi Arabia, Yemen, and other countries in deals with revenues of approximately €95 million.” According to the information, at least €3.88 million of the €6.05 million comprised of “improper payments and gifts [...] paid to foreign government officials or to third parties with the understanding that the payments and gifts would be passed on, in whole or in part, to foreign government officials to assist in securing the sale of Daimler vehicles to government customers.”

Indonesia

As to Indonesia, the information charges that “Daimler’s local affiliates provides gifts, travel and entertainment to government officials associated with Perum Damri in order to secure business.” According to the information, Perum Damri (see here) is a “state-owned bus company” and an “instrumenality of the Indonesian government” thus making its employees “foreign officials” under the FCPA. The information alleges that between 1998 and 2005, “Daimler’s local affiliates spent approximately $41,000 on such gifts, including golf clubs, wedding gifts for the children of a senior offical at Perum Damri, golf outings for Perum Damri officials, and gifts that were raffled off to low-level employees on the occasion of Perum Damri’s anniversary. According to the information, Perum Damri purchased approximately $8.36 million worth of buses from Daimler’s Indonesian affiliates. The information also alleges that “Daimler’s local affiliates also made several large cash payments to tax officials in Indonesia for the purpose of reducing their tax obligations.”

Iraq

As to Iraq, the information charges, what has become, standard Iraqi Oil for Food Program allegations in that Daimler “agreed to pay a 10% commission to the government of Iraq in connection with sales of its vehicles under the [Oil for Food Program].” Yet in a twist, the information states certain sales between “Daimler and the Iraqi government were prepared, negotiated and finalized by employees at Daimler’s headquarters in Germany” and that “Daimler negotiated its [Oil for Food Contracts] directly with the government of Iraq.” (In many of the prior Oil for Food cases, the Iraqi government contracts were prepared, negotiated, and finalized primarily by third-party agents retained by the offending company). When third party agents were used by Daimler to make sales to the Iraqi government, the information charges that Daimler executives “understood that Daimler’s contract partners would pay illegal kickbacks to Iraqi ministries.”

After this laundry list of bribes in several differnt countries, the information then alleges that “prior to 2005, Daimler’s anti-bribery compliance program was inadequate.” Among other things, the information alleges that Daimler had “inadequate guidelines and controls concerning the disbursement of cash from cash desks;” inadequate controls over other corporate accounts; “inadequate controls over the opening and maintaining of bank accounts;” “inadequate controls over the selection, use, and making of payments to agents and intermediaries;” and “inadequate training of Daimler employees on FCPA or other anti-bribery compliance.”

Against this backdrop, one might assume that Daimler was charged with FCPA antibribery violations – which generally prohibit the payment of money or anything of value, to a foreign official, in order to obtain or retain business.

However, in this current facade era of FCPA enforcement, nothing can be taken for granted and the Daimler enforcement action is yet another instance of bribery, yet no bribery, as Daimler was merely charged with two counts: (i) conspiracy to violate the FCPA’s books and records provisions; and (ii) knowingly falsifying books, records, and accounts – a criminal charge under 78m(b)(5).

Even more troubling, Daimler will not even by pleading guilty to these charges, because the charges are being resolved through a deferred prosecution agreement (“DPA”).

Daimler AG’s Deferred Prosecution Agreement

The DPA (see here) is a fairly standard FCPA DPA in that in return for the DOJ deferring prosecution of the criminal charges against Daimler, Daimler “admits, accepts, and acknowledges that is is responsible for the acts of its employees, subsidiaries, and agents” as set forth above. As is common, Daimler also agrees to a host of compliance undertakings, including hiring an independent monitor for a three year period (an issue discussed in this prior post).

The term of the DPA is an unusual two years and seven months after the guilty pleas of ETF and DCAR (most FCPA NPAs or DPAs are for whole year terms). Also unusual is that the DPA states that if the DOJ finds “in its sole discretion, that there exists a change in circustances sufficient to eliminate the need for the corporate compliance monitor … and that other provisions of [the DPA] have been satisfied, the Term of the Agreement may be terminated early.”

Like other NPAs and DPAs, the Daimler DPA essentially muzzles Daimler, its directors, its employees, and agents, from making “any public statement … contradicting the acceptance of responsibility by Daimler” for the facts set forth in the charging documents. In this way, DOJ is able to insulate itself from criticism from the only other party besides DOJ (i.e. Daimler) that actually knows the precise facts and issues relevant to the charged conduct. Specifically, if Daimler wants to issue a press release relevant to this case, it must first get DOJ’s approval.

The DPA also states: “with respect to Daimler’s present reliability and responsibility as a government contractor, the Department agrees to cooperate with Daimler, in a form and manner to be agreed, in bringing facts relating to the nature of the conduct underlying this Agreement and to Daimler’s cooperation and remediation to the attention of governmental and other debarment authorities, including Multinational Development Banks, as requested.”

Thus, as in the BAE and Siemens bribery, yet no bribery enforcement actions, debarment seems to have been a key factor in selecting the actual charges against Daimler – a fact confirmed by the DOJ’s sentencing memorandum described below.

Daimler Export and Trade Finance GmbH and the Croatian Firetrucks

DOJ also filed a two count criminal information against Daimler Export and Trade Finance GmbH (“ETF”) which is described as wholly-owned subsidiary of Daimler Financial Services AG (“DFS”), which in turn is described as a wholly-owned subsidiary of Daimler AG. According to the information, “ETF specialized in the structuring and arranging of customized financing solutions for exports by Daimler and external customers to countries without a local DFS company.” “In addition,” the information charges that “ETF participated in business ventures outside of Daimler’s core businesses of the manufacture and sale of passenger cars and vehicles.”

The charged conduct involves selling fire trucks to the Croatian Ministry of the Interior (“MOI”) as well as the conduct of IM Metal (“IMM”) an alleged “Croatian government controlled and partially owned former weapons manufacturer.” The information charges that “IMM was an ‘instrumentality’ of the Croatian government, and executives employed by IMM, or their designess were ‘foreign officials’ as those terms are used in the FCPA …” The charged conduct also involves Biotop Group, Inc. (“Biotop”), a Delaware corporation and Marketing Research and Consultants LLC (“MRC”), a Wyoming corporation.

Count one of the information charges conspiracy and alleges that “from in or about 2002, through in or about January 2008″ ETF, and others were engaged in a conspiracy to “make improper payments to Croatian government officials to induce them to cause the Croatian government agencies and instrumentalities to purchase Daimler vehicles.”

Among other things, the information charges that:

prior to be awarded a €85 million fire truck contract, “ETF understood that improper payments to Croatian government officials would be required in order to secure the Fire Truck Contract from the Croatian MOI;”

“ETF made improper payments directly to Croatian government officials and to third parties with the understanding that the payments would be passed on, in whole or in part, to Croatian government officials to assist in the Fire Truck Contract;”

“between 2002 and January 2008, ETF made approximately €3.02 million in payments to IMM and/or its principles in connection with the contract to sell fire trucks to the Croatian MOI with the understanding that all or a portion of the funds were paid to IMM’s employees, themselves foreign government officials, and that another portion of the funds were paid to Croatian government officials outside IMM in exchange for assistance in securing for the ETF-led consortium the Fire Truck Contract;” and

“in total, between 2002 and January 2008, ETF made approximately €1,673,349 in improper payments to Biotop and MRC in connection with the Fire Truck Contract with the understanding that those payments would be passed on, in whole or in part, to Croatian government officials” and that “neither Biotop nor MRC performed legitimate services for ETF sufficient to warrant payments in those amounts.”

The information alleges that “ETF entered into a sham consulting contract with Biotop in order to conceal the nature of improper payments ETF made to Biotop, and with the understanding that these funds would be passed on, in whole or in part, to Croatian government officials to assist in securing the Fire Trucks Contract with the Croatian MOI.” As to MRC, the information alleges that “six days after MRC’s incorporation, ETF executed a written consulting contract with MRC in order to conceal the nature of improper payments being made to MRC, with the understanding that the payments to MRC would be passed on, in whole or in part, to Croatian government officials.”

Count two of the information charges an FCPA antibribery violation. Because ETF is a foreign entity, the applicable section of the statute is 78dd-3 which requries a U.S. nexus. The information charges “ETF entered into sham consulting contracts with shell companies incorporated in Delaware and Wyoming for the purpose of making improper payments to Croatian government officials, and made payments to those companies’ accounts outside the United States with the understanding that such payments would be passed on, in whole or in part, to Croatian government officials.”

Because the information charges that ETF’s payments to Biotop and MRC were to the companies’ accounts “outside the United States” it appears that the sole U.S. nexus DOJ is using to charge ETF with an FCPA antibribery is the act of entering into a contract with a U.S. company.

DaimlerChrysler China Ltd. and the Chinese “Foreign Officials”

DOJ also filed a two count criminal information against DaimlerChrysler China Ltd. (“DCCL”), a “Beijing-based, wholly-owned Daimler subsidiary and cost center that managed Daimler’s business relationships in [China], assisted Daimler in selecting and managing joint ventures in China, and helped manage Daimler’s expatriate employees in China.” According to the information, “although DCCL did not itself sell any vehicles directly into China, certain DCCL employees assisted with the sale of vehicles by various Daimler divisions in Germany to government customers in China.”

The charged conduct focuses solely on three Chinese state-owned entities the DOJ alleges are “instrumentalities” of the Chinese government.

First, the DOJ alleges that “The Bureau of Geophysical Prospecting (“BGP”) was a division of the China National Petroleum Corporation (“CNPC”), a Chinese state-owned oil company” and that “among other things, BGP was involved in searching for oil in various regions of China” and that “BGP was an ‘instrumentality’ of the Chinese government, and individuals employed by BGP were ‘foreign officials’” under the FCPA. According to its website (see here), BGP is a limited liability company and it has “forty overseas branches and offices have been established in Asia, America, Africa and the Middle East” (see here). According to its website (here), CNPC ” is China’s largest oil and gas producer and supplier, as well as one of the world’s major oilfield service providers and a globally reputed contractor in engineering construction” and it has “a presence in almost 70 countries.” CNPC’s corporate hierachy (here) looks similar to other commercial enterprises and one of CNPC’s largest holdings is PetroChina, an entity with shares traded on the New York Stock Exchange as well as other exchanges (see here).

Second, the DOJ alleges that “Sinopec Corp. (“Sinopec”) was a Chinese state-owned energy company involved in, among other things, exploration and production of petroleum and natural gas, as well as the refining and sale of petroleum products” and that “Sinopec was an ‘instrumenality’ of the Chinese government, and individuals employed by Sinopec were ‘foreign officials’” under the FCPA. According to its website (here) Sinopec is “a listed company on domestic and international stock exchanges” and it has shares traded in Shanghai, Hong Kong, New York and London.

Third, the DOJ alleges that “Changqing Petroleum Exploration Bureau (“Changqing”) was a Chinese state-owned oil and natural gas extracting company” and that “Changqing was an ‘instrumentality’ of the Chinese government and individuals employed by Changqing were ‘foreign official’” under the FCPA. Changqing is an entity within CNPC’s extensive organization.

According to the information, “between 2000 and 2005, DCCL employees and/or Daimler employees through DCCL made at least €4,173,944 in improper payments in the form of ‘commissions,’ delegation travel, and gifts for the benefit of Chinese government officials and their designees, in connection with over €112,357,719 in sales” of vehicles to Chinese government customers. The information alleges that “these sales to Chinese government customers were made directly from Daimler’s [divisions] in Germany through various intermediaries with the assistance of DCCL employees in the commercial vehicles division.”

According to the information, “to make improper payments to Chinese government officials, Daimler and DCCL typically inflated the sales price of vehicles sold to Chinese government customers and then maintained the overpayments in debtor accounts on Daimler’s books and records, including one debtor account called the ‘special commissions’ account.” The information alleges that “DCCL employees, including its then head of sales and marketing disbursed payments” from the account and “at the time, no checks or policies were in place to ensure the legitimacy or appropriateness of such payments.”

According to the information, “DCCL and Daimler also employed agents to assist in securing” vehicles from Chinese government customers, but that “neither DCCL nor Daimler performed due diligence on these agents, and there were inadequate controls in place to ensure that payments made to these agents were not passed on to Chinese government officials and their designees.” The information states that “the agency agreements were often not in writing” and that “DCCL and Daimler lacked adequate oversight into the appropriateness or purpose of payments from debtor accounts that ultimately went to government officials in China and their designees.” The information charges that “finance and controls oversight was so lacking with respect to Daimler’s sale of commercial vehicles in China that DCCL’s Sales and Marketing Head was able to remove at least approximately €230,000 from a company debtor account without detection, and then direct those funds to the offshore bank account of his wife.”

Count one of the information charges conspiracy and alleges that DCCL, and others, were engaged in a conspiracy to “make improper payments to Chinese government officials to induce them to cause Chinese government agencies and instrumenalties to purchase Daimler vehicles.”

Among other things, the information charges that:

“in total, Daimler and DCCL made approximately €2,599,694 in improper payments to Chinese government officials associated with these entities to assist in obtaining sales worth approximately €71,562,882;”

“between 2001 and 2004, DCCL and Daimler at the direction of Chinese government officials made improper payments totaling at least €188,840 into U.S. bank accounts belonging to third parties to obtain contracts valued at €5,533,381 for the sale of vehicles to Chinese government customers “even though no part of the transaction involved the U.S., nor were the entities that nominally controlled the bank accounts parties to any of these transactions;” that “DCCL and Daimler did not perform any due diligence to discern who the recipients were” and the “corporate entities that received the payments from Daimler for the benefit of the Chinese government officials performed no legitimate services for DCCL or Daimler and did nothing to earn those payments;”

“between 1998 and 2005, DCCL and Daimler also provided at least €268,568 worth of delegation trips to employees of its government customers in China for the purpose of assisting in securing business from those customers;” according to the information “agents working as intermediaries between DCCL and Daimler, on the one hand, and its Chinese government customers, on the other hand, typically requested the delegation trips up front during the contract negotiation process on behalf of the customer involved” that “DCCL and Daimler then estimated the cost of the trip and increased the purchase price of vehicles accordingly” and that “some contracts characterized these trips as ‘factory inspection trips’ even though the trips were primarily visits to tourist locations.”

Additional payments charged in the information include: “€155,905 for the purpose of entertaining executives at” BGP and Sinopec; “payments totaling approximately €56,400 into accounts at multiple banks to an individual associated with an official at BGP in charge of operations in another country;” “a payment of approximately €14,800 to a relative of a Chinese government official associated with BGP in connection with the sale of commercial vehicles to BGP; “payments totaling approximately €30,000 in commissions for ‘market research’ to the Stuttgart bank account of the son of an official of BGP;” and “a payment of approximately €57,000 to the wife of a Chinese government official employed at Sinopec” disguised as a payment pursuant to a “phony consulting agreement with the wife of the Chinese government official.”

The information further charges a laundry list of “things of value” provided “to the son of a Chinese government official who made purchasing decisions for BGP in order to assist in securing business from BGP” including: interships at Daimler for his girlfriend; “letters from a former Daimler employee to German immigration officials to assist him and his girlfriend with their efforts to obtain student visas;” “€2,224 in expenses to attend a truck race;” “use of a Mercedes passenger car for a period of time;” and “employment at Daimler” for a five month period “with a monthly salary of €600.”

Count two of the information charges an FCPA antibribery violation. Because DCCL is a foreign entity, the applicable section of the statute is 78dd-3 which requires a U.S. nexus. As relevant to this issue, the information charges that “DCCL caused wire transfers to be sent from Daimler accounts in Germany to financial institutions in the United States.”

DaimlerChrysler Automotive Russia SAO and Russian Sales

DOJ also filed a two count criminal information against DaimlerChrysler Automotive Russia SAO (“DCAR”), a “Moscow-based, wholly-owned subsidiary of Daimler” that “sold Daimler spare parts, assisted with the sale of vehicles from various Daimler divisions in Germany, including in particular its overseas sales division (“DCOS”), to government customers in [Russia], and also imported Daimler passenger and commercial vehicles into Russia for sale to customers and distributors.”

The charged conduct focuses on Daimler’s, DCAR’s and DCOS’s relationships with: “the Russian Ministry of Internal Affairs (“MVD”) a department and agency of the Russian government principally responsible for police, militia, immigration and other functions” including supervising the “Russian traffic police; “the Special Purpose Garage (“SPG”) an ‘instrumenality’ of the Russian government” whose employees were “foreign officials” under the FCPA; “Machinoimport a Russian government-owned and controlled purchasing agent for the City of Moscow,” an “instrumentality of the Russian government” whose employees were “foreign officials” under the FCPA; and “Dorinvest a Russian government-owned and controlled purchasing agent for the City of Moscow,” an “instrumentality of the Russian government” whose employees were “foreign officials” under the FCPA.

According to the information, “Daimler’s business in Russia was substantial.” The information states that “Daimler sold passenger cars and commercial vehicles directly from its headquarters in Stuttgart, Germany, to its Russian government clients with the assistance of DCAR and Daimler’s representative office in Moscow” and that “Daimler carried out such sales from DCOS and DCAR acting as an agent to assist with such direct sales.”

The information charges that “Daimler, through DCAR, made improper payments at the request of Russian government officials or their designess in order to secure business from Russian government customers.” According to the information, payments were “made with the knowledge and involvement of the former senior management of DCAR and DCOS.”

The information states that “DCAR and Daimler sometimes made improper payments to government officials in Russia to secure business by over-invoicing the customer and paying the excess amount back to the government officials, or to other designated third parties that provided no legitimate services to Daimler or DCAR, with the understanding that such payments would be passed on, in whole or in part, to Russian government officials.” The information further states that “when requested, Daimler employees wired and authorized the wiring of payments from Daimler’s bank accounts in Germany to, among other destinations, U.S. and Latvian bank accounts beneficially owned by shell companies with the understanding that the money, in whole or in part, was for the benefit of Russian government officials.”

Count one of the information charges conspiracy and that DCAR, and others, were engaged in a conspiracy to “make improper payments to Russian government officials to induce them to cause Russian government agencies and instrumentalties to purchase Daimler vehicles.”

Among other things, the information charges that:

“between 2000 and 2005″ Daimler’s sale of vehicles to Russian government customers was approximately “€64,660,000″ and that “in connection with these vehicle sales, DCAR and Daimler made over €3 million in improper payments to Russian government officials employed at their Russian governmental customers, their designess, or to third-party shell companies that provided no legitimate services to Daimler or DCAR with the understanding that the funds would be passed on, in whole or in part, to Russian government officials.”

According to the information, the payments were routed all over the world including: “to the Deutsche Bank acount in Stuttgart, Germany, of a Russian government official at the SPG;” to “Berwick Commercial LLC, a corporation registered in Delaware, with the understanding that the payment would be passed on, in whole or in part, to the SPG official;” “to Kongress Food Ltd., a corporation with an address in Dublin, Ireland, with the understanding that the payments would be passed on, in whole or in part, to the SPG official;” “to Delight Commercial Ltd., a corporation with an address in the Seychelles, with the understanding that the payments would be passed on, in whole or in part, to the SPG official;” “to Pyrmont Alliance Corp., a corporation with an address in the Bahamas, with the understanding that the payments would be passed on, in whole or in part, to the SPG official;” “to Loretti LLP, a corporation with an address in the United Kingdom, with the understanding that the payment would be passed on, in whole or in part, to the SPG official;” “to a Bank of America account in San Diego, California, for Sittard Investments, a California corporation, to secure passenger car sales to the Moscow tarffic police;” “to a bank account in Latvia for Novitta Ltd., a Delaware corporation, in connection with passenger car sales to the MVD;” “to a bank account in Latvia for Tower Block Ventures, a U.K. corporation, for the benefit of a consultant to the MVD in connection with passenger car sales to the MVD;” “to a bank account in Latvia for Silvarado Ltd., a corporation that provided no legitimate services for Daimler or DCAR, in connection with passenger car sales to the MVD;” “to a bank account in Latvia for Capital Alliance Corp., a Florida corporation, in connection with passenger car sales to the MVD and to the Russian military;” “to Technoforex, a Delaware corporation, to secure the sale of one commercial vehicle to the SPG;” “to Contrex, a Cyprus corporation established for the benefit of the wife” of an official;” “to the Latvian bank account of Fidelity Finance Corporation, a Delaware corporation, in connection with the sale [of vehicles] to Gormost, a department within the city of Moscow responsible for bridges and tunnels, with the understanding that such payments would be passed on, in whole or in part, to Russian government officials in order to secure this sale;” “to Fidelity Finance Corporation’s Latvian bank account with the understanding that such payment would be passed on, in whole or in part, to Russian government officials;” “to the Latvian bank account of Forfun Co., a Delaware corporation, in connection with the sale [of vehicles] with the understanding that such payment would be passed on, in whole or in part, to Russian military officials;” “to the Swiss bank account of Northcote Holdings, a Costa Rican corporation, with the understanding that such payment would be passed on, in whole or in part, to Russian military officials;” and “to the bank account of Crofton Allianz, a Delaware corporation” “with the understanding that such payment would be passed on, in whole or in part, to a Russian government official.”

Count two of the information charges an FCPA antibribery violation. Because DCAR is a foreign entity, the applicable section of the statute is 78dd-3 which requires a U.S. nexus. As relevant to this issue, the information charges that “DCAR caused wire transfers to be sent from Daimler accounts in Germany to financial institutions in the United States and elsewhere, via international and interstate wires, in furtherance of corrupt payments to Russian government officials” and that “DCAR made payments to third party agents, including shell companies established in the United States, knowing that such payments would be passed on, in whole or in part, to Russian government officials on behalf of DCAR and Daimler.”

DOJ’s Sentencing Memorandum

In the sentencing memo (here) DOJ “respectfully requests that the Court” approve the disposition of the matter against Daimler and all of the above referenced entities and “accept the guilty pleas of DaimlerChrysler Automotive Russia SAO and Daimler Export and Trade Finance GmbH.” The memo notes, in a footnote, that “the court will not actually be sentencing Daimler AG and DaimlerChrysler China Ltd., as those entities have entered into deferred prosecution agreements.”

The DOJ provides this summary of the overall disposition of the matter:

“The Department and Daimler agree that the appropriate resolution of this matter consists of (1) a DPA with Daimler AG, the parent company; (2) a DPA with DCCL, the Chinese subsidiary; (3) guilty pleas pursuant to plea agreements with DCAR, the Russian subsidiary, and ETF, the Daimler Finance subsidiary; (4) overall payment of a $93.6 million criminal penalty, which is apportioned, based on a Guidelines analysis, among the subsidiaries and the parent company; (5) continued obligations to provide full, complete, and truthful cooperation to the Department and any other law enforcement agency, domestic or foreign; (6) implementation of rigorous compliance enhancements, including periodic testing of same, with a recognition that the Company has already implemented substantial changes due to the investigation; and (7) the imposition of a corporate compliance monitor who will, over a three-year term, conduct a review of the compliance code, the Company’s internal controls and related issues, and will prepare periodic reports on his reviews.”

DOJ specifically notes that its “analysis of collateral consequences included the consideration of the risk of debarment and exclusion from government contracts, and in particular European Union Directive 2004/18/EC, which provides that companies convicted of corruption offenses shall be mandatorily excluded from government contracts in all EU countries.”

As the Daimler, the BAE and Siemens enforcement actions all make clear, the simple way to avoid application of the European Union Directive is not to charge the company with a corruption offense, notwithstanding the existence of facts to support such a conviction.

This “let’s not call a spade a spade” silliness occurs notwithstanding the fact that the U.S. is a member of the OECD. As relevant, OECD guidance specifically states that “Member countries should be vigilant in ensuring that investigations and prosecutions of the bribery of foreign public officials in international business transactions are not influenced by considerations of national economic interest, the potential effect upon relations with another State or the identity of the natural or legal persons involved, in compliance with Article 5 of the OECD Anti Bribery Convention.”

The DOJ’s sentencing guidelines calculations contains a bit of irony in that Daimler received a sentencing credit (a credit which reduces the overall fine amount) because the “organization fully cooperated in the investigation and clearly demonstated recognition and affirmative acceptance of responsiblity for its criminal conduct” despite the fact that elsewhere in the sentencing memo the DOJ notes that the entire investigation started in March 2004 when a “former Daimler employee filed a whistleblower complaint with the U.S. Department of Labor Occupational Safety & Health Administration … allege[ing] that he was terminated for voicing concerns about Daimler’s practice of maintaining secret accounts, including accounts in its own books and records, for the purpose of bribing foreign government officials.”

In other words, even if an investigation is hatched by an internal whistleblower, a company may still be able to receive a sentencing credit for cooperating in the eventual investigation.

The sentencing range set forth in the DOJ memo is $116 – $232 million. Thus, the $93.6 million penalty is 20% below the bottom fine range of $116 million.

DOJ seeks to justify this reduction by stating that such a “reduction is appropriate given the nature and extent of Daimler’s cooperation in this matter, including sharing information with the Department regarding evidence obtained as a result of Daimler’s extensive investigation of corrupt payments around the world.”

The DOJ further states, “indeed, because Daimler did not voluntarily disclose its conduct prior to the filing of the whistleblower lawsuit, it only receives a two-point reduction in its culpability.” However, in a rather odd statement, DOJ then said that it “respectfully submits that such reduction is incongruent with the level of cooperation and assistance provided by the company in the Department’s investigation.” In other words, the DOJ seems to be saying something like “who cares what the guidelines say, we will do what we feel like.”

In conclusion, the DOJ notes that the disposition “promotes respect for the law, provides just punishment, and affords adequate deterrence to criminal conduct for Daimler and the marketplace generally.”

This would seem to be the biggest April Fools joke of all. How does another bribery, yet no bribery enforcement action “promote respect for the law?”

Finally, the DOJ states that Daimler’s cooperation in the investigation has been “excellent.” The DOJ notes that Daimler “conducted a worldwide internal investigation;” “regularly presented it findings” to the DOJ; “made certain witnesses available to the Department;” “voluntarily complied with requests for the production of documents from overseas;” and took disciplinary actions against over “60 company employees, with approximately 45 employees being terminated or separated under termination agreements.” “Finally, and perhaps most significantly,” in the words of the DOJ, “Daimler began to reform its anti-bribery compliance program while the investigation was still ongoing, without waiting until the finalization of a disposition with the Department.” The sentencing memo then sets forth a list of changes Daimler made to its compliance program. Such measures, no doubt, will now come to be viewed as “best practices.”